Tuesday, April 14, 2020

Chase Bank & Wells Fargo Prepare for Round of Defaults


These two banks are taking today about a combined $10B loan loss reserve for the Wuhan Virus... Citi and BofA reporting later this week probably count them in for another $10B so maybe $20B total from the 4 money centers...  so far...




This will act to reduce the bank system assets by the same amount.... so banking system Residual Value (A-L) will drop by the $20B plus what the rest of the system estimates for losses due to the virus... 30ish total maybe?


Here is a short paper from the Richmond Fed on the accounting treatment for this type of transaction; you can see these transactions act to REDUCE the value of Loan Assets at the banks and will thus reduce Residual (A-L) and the total Leverage Ratio (A-L)/A .... these developments are accordingly generally bearish for risk assets...




You have to monitor the Fed's weekly bank reports as the weeks and perhaps months go by to see how bad this is going to get for Banking System Residual and Leverage...




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